The TARP's Blank Check

A lot of people have been looking at the
changes to compensation limits included in the stimulus bill and
wondered: "Hey can they do that?" Can the government
really unilaterally change the terms of the deal with banks that
have already taken TARP funds? Isn't that a bit unfair?

As my father used to say, life is unfair. And so is the TARP.
Included in each of the contracts the banks signed with the
government to get TARP funds is a short section that makes it
clear that they are now completely at the mercy of the
government.

TARP's "Securities Purchase Agreements" each contain a Trojan
Horse clause, Section 5.3, stating that Treasury may
"unilaterally amend" the agreement to comply with changes in
federal statutes. In short, Congress has the power to
retroactively amend the terms of the bailout...

Keep in mind that this has a plus side. It allows the government
to quickly react to any shenanigans from banks to abuse the TARP
program. The government is at a huge disadvantage when
negotiating deals with investment bankers, folks who do this kind
of thing for a living. Allowing the government to revisit the
deals once they have begun to operate is a great advantage.

Unfortunately, our government doesn't operate as cleanly as all
that. Rather than clamping down on banking shenanigans, the
'blank check' clause allows special interests to step in and
demand concessions from banks. We've already seen the begining of
political lending when Illinois Governor Rod Blagojevich used
TARP to pressure Bank of America into paying over a million
dollars to a union at a window-maker's shop.